SEBI Introduces New Category Of Mutual Fund Schemes For Environmental, Social And Governance (“ESG”) Investing And Related Disclosures

As per the circular, the ESG category will encompass several strategies that mutual funds can adopt to align their investments with environmental, social, and governance considerations. These strategies include:

1. Exclusion: This strategy involves excluding securities based on certain ESG-related activities, business practices, or business segments. The exclusions can be based on factors such as adverse impact, controversy, or faith.

2. Integration: Funds adopting this theme will consider ESG-related factors that are material to the risk and return of the investment, alongside traditional financial factors, when making investment decisions.

3. Best-in-class & Positive Screening: This strategy aims to invest in companies and issuers that outperform their peers on one or more ESG performance metrics.

4. Impact Investing: These funds seek to generate a positive, measurable social or environmental impact alongside a financial return. Fund managers must provide a methodology for assessing the impact of investments and have processes in place to identify and manage any adverse effects.

5. Sustainable Objectives: Funds under this category will invest in sectors, industries, or companies expected to benefit from long-term macro or structural ESG-related trends.

6. Transition or Transition-Related Investments: These schemes will focus on companies and issuers that support or facilitate environmental and just transitions.

SEBI has also allowed mutual funds to launch multiple schemes with different ESG strategies, addressing industry demands and reducing the risk of greenwashing. However, the regulator mandates that at least 80% of the assets under management in each scheme should be invested in equity and equity-related instruments aligned with the scheme's chosen strategy. The remaining 20% should not contradict the scheme's objectives.

Moreover, 65% of the assets under management must be invested in companies with comprehensive business-responsibility and sustainability reporting disclosures, along with assurance on BRSR (Business Responsibility and Sustainability Reporting) Core disclosures. The balance AUM can be invested in companies with BRSR disclosures. This requirement will come into effect from October 1, 2024.

Additionally, Asset Management Companies (AMCs) are required to disclose votes cast on their websites quarterly, along with the rationale supporting their voting decisions. The disclosure should categorically state whether the resolution has been supported or not due to any environmental, social, or governance reasons. These enhanced voting disclosures will be applicable from April 1, 2024.

The introduction of the new category aims to encourage responsible investing and foster sustainable practices in the financial markets. Investors can now make informed choices to align their portfolios with their ESG preferences and contribute to a more sustainable future.

Circular No. SEBI/HO/IMD/IMD-I –PoD1/P/CIR/2023/125

Date: 20.07.2023

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